Question

Owner Lei Wong is considering franchising her Oriental Joy restaurant concept. She believes people will pay $ 5.25 for a large bowl of noodles. Variable costs are $ 2.10 a bowl. Wong estimates monthly fixed costs for franchisees at $ 7, 500.

Requirements:
1. Find a franchisee's breakeven sales in dollars.
2. Is franchising a good idea for Wong if franchisees want a minimum monthly operating income of $6,000 and Wong believes that most locations could generate $26,000 in monthly sales?

Answer 1

a)Break-even point = $12,500

b) Yes, franchising is a good idea for Wong

Step-by-step explanation:

Break-even sales

The break-even point is the amount of sales in dollars that a business must make to get a no profit or loss result. At this point, the total contribution is exactly the same as the the total fixed cost.

BEP = = Fixed costs /CMR

CMR - contribution margin ratio

=( (selling price- variable cost)/selling price) × 100

= (5.25-2.10)/5.25 × 100 = 60%

BEP = 7,500/0.6 = $12,500

b) The monthly sales to generate a profit of $6,000

=( Fixed cost + operating income) /CMR

Monthly sales to make $6,000 = 7,500 + 6000/0.6

= $22,500

$22,500 is the amount of sales required to generate a monthly operating income of $6,000, and this is is less than the monthly sales estimates of $26,000. This implies that the target income is achievable by the franchisees and is a good idea for Wong.